How Investment Banks Work And Operate
First, let's look at who Investment Bankers are so you can understand what makes them tick
. Most Investment Bankers are former retail stock brokers who started out on Wall Street with some of the major Brokerage Firms.There job was basically to sign up as many accounts as possible and buy and sell stocks for clients. From there they moved up to the Investment Banking department of these firms.
Investment Banking involves raising capital for private and public companies. The larger brokerage firms are constantly on the lookout for new companies. They want to raise Venture Capital for these companies and establish what they hope will be a long term relationship.
It is a very good idea for your Management Team to establish relationships with these firms because their assistance is very valuable.
Now we all know that Investment Bankers Investment Bankers want to make money just like everyone else, but let's examine a typical fee structure. They usually charge a cash fee of 10% of the amount they raise and 10% of that amount in stock.
If your company is private then they do an evaluation to figure out the number of shares they will receive. These shares also come with Registration Rights. This requires the shares to be registered with the US Securities & Exchange Commission, if and when the company becomes publicly listed.
Now that may seem like motivation enough, after all if they raise $2,000,000 for you company, they get a $200,000 fee and stock in your company as well. If they close a few deals each year those numbers sure add up.
But they are not just in the game for one time deals. They usually require a right of first refusal to raise you subsequent financing during the next twelve months should your company need it. They would love to raise money for the same company 2 or 3 times in the same year. If your company is doing well, the Investment Bankers simply use the same funding source to keep investing in your company.
Investment Banking firms also try to get a monthly cash fee for advising companies they represent on securities matters. These matters can include corporate structure or reorganization, search for quality board members, referrals to securities attorneys or auditing firms, as well as advice and help to become a publicly listed company.
Lastly, Investment Banking firms are involved in Mergers and Acquisitions. There are big fees involved in this area as well. They may even recommend your company purchase another company in a related field. This could turn out to be a very strategic move for your company, and of course the Investment Banking Firm will make its usual fee. But they may also own stock in the other company you will be acquiring, because they may have raised capital for them at one time and helped them to grow.
There is nothing wrong with that, it may be a great move for your company to make. I am just trying to illustrate that Investment Bankers are highly motivate. They want to make lots of money just like most people. The best way they can accomplish that however, is for them to find good companies that they can raise capital for and help them grow. Hopefully, your company is one of those.
by: Alvin Donovan